Indonesia Growth Seen Near Two-Year Low on Commodities: Economy

Indonesia’s economy probably expanded
near the slowest pace in more than two years last quarter as a
decline in commodity prices hurt exports, adding to signs of
easing global growth.

Gross domestic product probably grew 6.12 percent in the
three months through March from a year earlier, after expanding
6.11 percent the previous quarter, according to the median
estimate of eight economists surveyed by Bloomberg News. The
government will release the figures May 6.

A weak expansion in Southeast Asia’s largest economy may
make it more difficult for President Susilo Bambang Yudhoyono to
reduce fuel subsidies and curb the budget deficit as he tries to
allocate more funds to infrastructure. The International
Monetary Fund last month lowered its forecasts for global growth
in 2013, while China and the U.S. expanded less than analysts
estimated last quarter.

“We’ve written off a pickup in the developed world and
China is struggling as well, and the demand shortfall is
impacting Indonesia and other Southeast Asian nations,” said
Kevin Lai, an economist at Daiwa Capital Markets Hong Kong Ltd.
“Indonesia’s domestic demand is quite resilient but the
correction in commodity prices and the external situation means
its growth will not be the same as before.”

The Standard & Poor’s GSCI (SPGSCI) gauge of 24 commodities has
retreated 5.5 percent this year. Indonesia is the biggest
producer of palm oil, and its commodity exports include coal,
rubber, tin and cocoa.

Biggest Loser

The rupiah was the biggest loser against the dollar after
the Japanese yen last year among 11 Asian currencies tracked by
Bloomberg. It has gained 0.7 percent so far this year.

Hundreds of thousands of demonstrators marched in capital
Jakarta yesterday to protest against the planned fuel increases
and to demand higher wages, adding pressure on the government
ahead of elections in 2014.

Yudhoyono said this week he will only increase fuel prices
after Parliament approves compensation programs for the poor, a
move that could delay efforts to contain a budget deficit that
may be more than twice as much as estimated without subsidy cuts.
Failure to reduce subsidies last year drained government
finances and led to a record current-account shortfall, hurting
the rupiah as foreign investors lost confidence.

“The compensation program will have to go through the mid-
year budget revision process, which could last until mid- or
end-June,” said Helmi Arman, an economist at Citigroup Inc. in
Jakarta. “Compared to 2012, negotiations with parliament will
likely be on the form of the program and how funds will be
distributed. But it’s not smooth sailing yet as hiking in July
may cost extra political capital” because of the fasting month
of Ramadan, he said.

Wider Deficit

Without a reduction in fuel subsidies, the deficit may rise
to 3.83 percent of gross domestic product from 1.65 percent,
Yudhoyono has said.

Indonesia’s overseas shipments fell the most in seven
months in March, while imports dropped the most since 2009, the
statistics department said yesterday.

Signs of a slowdown are also evident elsewhere in the
region. Australia said today building approvals rose less than a
third of analysts’ estimates in March from a year earlier, while
a China purchasing managers’ index showed slower expansion in
manufacturing in April.

In Europe, PMI readings are expected to confirm deeper
contractions in manufacturing in Germany and the euro area last
month, while reports in the U.S. are expected to show a trade
deficit of $42.3 billion in March from $43 billion in February,
and jobless claims rose in the week through April 27.

Price Gains

Indonesia’s consumer price gains eased to 5.57 percent last
month from a year earlier and the central bank has held
borrowing costs for 14 meetings. Policy makers next meet on May
14. While all economists surveyed by Bloomberg News forecast
Bank Indonesia will keep rates unchanged this month, some
predict it may raise borrowing costs in the coming quarters as
fuel price increases spur inflation.

A “rate hike should not be ruled out this year and we
continue to expect the possibility of 50 basis points” of
increases in the second half, said Gundy Cahyadi, an economist
at Oversea-Chinese Banking Corp. in Singapore.

The government may lower its target for growth this year to
a range of 6.3 percent to 6.5 percent, from 6.8 percent
previously, Deputy Finance Minister Mahendra Siregar said April
24.

“The impact of a fuel price hike on growth will be
manageable but monetary tightening and an import slowdown will
hit growth more,” said Enrico Tanuwidjaja, a Singapore-based
economist at Royal Bank of Scotland Group Plc.